EU ratchets up pressure with Greek default threat

European Union officials have stepped up pressure on Greece and its creditor
banks in a complex game of three-way brinkmanship, signalling that they will
allow a Greek default to run its course unless both sides accept more pain.

The head of the European Commission's economics team said Brussels is prepared to allow credit default swaps on Greek bonds to come into play if talks fail to reach a deal.Photo: AP

Austria's finance minister Maria Fekter said patience with Athens is exhausted. "Greece has failed its austerity targets by a wide margin. The Greeks have made decisions, but they weren't implemented. They have agreed to austerity measures, but costs haven't come down. This situation has caused great consternation," she said at a meeting of EU finance minister in Brussels.

"We're sending a direct message to Greece that the community expects more. We're not pleased and only when there's a written message on the table in front of us, can further assistance be discussed," she said.

The head of the European Commission's economics team Mario Buti said Brussels is prepared to allow credit default swaps (CDS) on Greek bonds to come into play if talks fail to reach a deal that gives Greece enough debt relief to claw its way back to viability. "Triggering CDS may have to be considered," he said.

The comment is a clear warning to private creditors holding €206bn (£172bn) of Greek debt that the EU will not step in with fresh money to prevent a default on March 20, when Greece must make a €14.5bn debt payment.

The EU authorities are demanding that banks, insurers, and pension funds accept a cut in the interest rate on new bonds to 3.5pc – on top of the 50pc haircut agreed – to reflect the drastic deterioration in Greece. The creditors are holding out for 4pc. EU officials would leave Greece's debt at 125pc of GDP by 2020, above the 120pc level deemed the maximum tolerable burden.

Charlesa Dallara, the head of the International Institute for Finance (IIF) representing creditor banks, said EU officials were playing with fire by talking about default and demanded that the EU stick to the agreement reached last October.

"We put an offer on the table and it remains on the table. All parties need to contribute to the solution. We are wiping off the face of the earth €100bn in existing claims against Greece," he told Bloomberg.

The continued failure to reach a deal began rattle markets, halting the last week's rally on bourses on both sides of the Atlantic.

The Commission said the EU's new permanent rescue fund – the European Stability Mechanism (ESM) – would come into force by mid-summer. Whether it will help to contain the crisis is disputed.

Harvinder Sian from RBS said it is more likely to act as a "crisis accelerator" because the ESM is a different animal from the existing EFSF bail-out fund. Its mandate is to withhold rescue loans until private creditors have taken a haircut. "The ESM is better thought of as a mechanism for orderly debt work-outs and a way to limit the liability for core EMU. This hangs as a threat for Spain and Italy."

Mr Sian said it heightens fears of coercion and risks setting off a faster exodus from the debt markets of all the troubled countries.